Being a landlord can seem daunting and it’s easy to fall into one of several pitfalls open to new landlords. We wanted to share with you some advice for new landlords. Leicester Property Insight and Harry Albert Lettings & Estates has a wealth of information available to landlords, whether you’re brand new to the industry or a seasoned veteran of residential lettings, they add value to the lives of landlords by assisting them to keep on top of current legislation and providing up to date documents for you to use as a landlord to make your life a little bit easier.
The National Landlords Association has released guidance for new landlords which can be found here and we’re sharing with you the basics of becoming a landlord.
NEW BUILD TEMPTATION
The NLA carried out research which shows 80% of smaller landlords who own up to four property own at least one new build property; these new build homes can be very tempting for buyers, especially first time or new landlords; because they’re easy to let and low maintenance and often being sold at a ‘discount’, especially when purchased off plan, by developers. However, new builds come with their own pitfalls, including vulnerability to large falls in value should the market experience a downturn. The ‘discount’ offered can often be the target sale price, remembering developers will often negotiate on price just like any other private treaty sale.
It isn’t uncommon for individual units within a block of flats or the block of flats itself to be sold to investors off-plan (meaning not yet built); this creates an upsurge in rental properties once the development has been completed and this may cause an oversupply with less demand, as a result, causing long-term void periods before you find your first tenants. The salespeople who sell these investment vehicles to you may be optimistic about what kind of rent you can achieve, as they’re often paid commission on top of any other wages or salaries. Because so many properties reach the market at the same time, it wouldn’t be unlikely that landlords will lower their rents in a bid to attract new tenants and to minimise void periods, this could be costly in the long-term, especially if you don’t also lower your rents to remain competitive therefore leading to even longer void periods. Owning a flat will often mean you’re a leaseholder and you’ll have to be mindful of block management fees and other charges.
It’s important to be clear on your purchase strategy from the start; it goes without saying, location is key. You might be tempted to buy cheaper properties far away from where you live, many landlords make the mistake of buying in London expecting increased yields but this simply isn’t the case anymore and in fact, landlords are exiting the market due to the dwindling yields, other landlords look far North for heavily discounted properties, either way, they fail to be able to manage them themselves. Landlords need to think about the implications of remote management and the costs involved in employing a letting agent or property manager. Instead, especially as a new landlord, you should look closer to home, even if you do opt for a managing agent (we recommend Harry Albert Lettings & Estates). By starting local, you’ll likely already have an idea about the local market, the area, what rents you could expect and, at the very least, you’ll be able to step in if something goes wrong and you have to sack your managing agent!
By looking at local area trends and using the knowledge of the area you have already, as well as considering the type of property and let (whether it will be a short-term let, long-term family let or HMO, student accommodation, etc), as well as how it will be managed and your potential exit, you’ll be able to put together a strategy and understand how you might achieve the best returns. You’ll also want to consider the type of tenant you’ll be letting your property to; if you’re hoping to let your property to students, there would be little demand in an area with poor transport links and no universities or colleges nearby.
The NLA say;
“As a general guide, if you have £50,000 to invest, you could buy a property worth £160,000. Out of £50,000 cash, you can pay £40,000 as a 25% deposit and utilise the remaining £10,000 for fees, furniture if letting furnished, and getting the property ready. Always seek a strong rental yield (rent calculated over a year), which should be at least 5-6% of the property value. If you are a cash buyer consider splitting your cash into smaller chunks and getting mortgages as this is more cost-effective. Visit NLA Mortgages (discounted for Full Members) to access the best mortgage deals in the market.”
Securing finance is one of the biggest challenges facing landlords new and old today and it’s only getting more difficult to finance new purchases. The NLA says;
“Getting finance continues to be quite complex. You may assume your credit file will not present you with problems, but there are a number of risks.
- Firstly you will need to have no adverse credit such as default accounts or County Court Judgments.
- Having more than 3 applications for credit on your file in a six month period can impair your credit file so only make an application for credit if you’re sure you want to proceed and prioritise mortgages because they require the highest possible credit score.
- High balances on credit cards can also affect your credit score, so if you can, pay off your cards before applying for a mortgage and end any that are no longer used rather than just waiting for them to expire.
- If you don’t already own a property and are purchasing a buy-to-let as your first property you could be restricted to a small number of lenders and may need to consult a broker.
- Many lenders require a minimum income (from acceptable sources such as employment and generally not rental income) of around £25,000 per annum to secure a loan.
- Generally first time landlords can choose from a wide range of lenders but beware that once you have a few properties many lenders impose caps on the number of properties you can own, either mortgaged with the lender you are applying to or a simple cap on all properties owned.
- Always check the lenders terms and conditions for any other expenses or hidden costs in the small print so you can factor these in.”
Landlord licensing is becoming a growing concern for private landlords and is preventing severe risks of dramatic rent price increases pricing lower-income tenants out of areas they may have lived in all their lives. Houses in multiple occupation (all buildings which are three or more storeys with five or more people living in two or more households) require a mandatory licence with local authorities having powers to extend these licensing requirements to other properties too, it’s important to check with your local city or borough council to see what licenses you may require.
Nottingham City Council are implementing selective licensing in some boroughs of Nottingham which costs £640 for up to five years; already, Nottingham tenants are seeing rapid increases in rent with some tenants expecting to be paying more than £60 a month in extra rent before the year 2020 to help landlords absorb the costs of licensing; this is set to rise further once letting agent fees are banned.
It’s important to check you meet the criteria of the licencing conditions as you won’t be given a refund of the application fee if it is declined. Licensing usually (if not always) comes with extra costs too so it’s important to do your homework and factor these costs into the rent you’ll charge and consider the impact they will have on your rental yield.
If the local borough has made an Article 4 planning direction you may not be allowed to let to unrelated people and could be restricted to family lets only. For details visit the HMO and Licensing section of the National Landlord Association’s Online Library.
We’d recommend landlords consider the National Landlord Association membership if you’re serious about remaining compliant and, more so, if you’re a first-time landlord.
Harry Albert Lettings & Estates are a Leicester Letting Agent based in Belgrave covering Leicester and Nottingham who specialise in helping first-time and new landlords.